IT sector Q1 outlook: Expect robust revenue growth, moderating margins

IT companies have emerged as a clear backbone for the pandemic hit economy. The nation was widely forced into a lockdown yet again after the second wave and technology providers kept the ball rolling for workplaces, education, business transactions and communications alike. As bellwether companies get ready to put out their earnings for the first quarter of financial year 2022, here’s what investors can expect.

Higher revenue growth

Experts see a  is likely to see a healthy start to this years earnings report as there is likely to be  a minimal impact of the second wave and the resultant lockdown on the IT players books. Strong order bookings, broad-based revenue growth and stable margins are expected to be the key highlights of the quarter for the IT sector.

The first quarter usually shows seasonal strength for the sector as it has higher billing days and there is an uptick in spending post the budget allocation.

Emkay global research in its report mentions that this time, one can expect healthy growth momentum to continue with USD revenue growth of 2.0-9.3% QoQ (quarter-on-quarter), however mid-cap IT firms may continue to outperform. The broad-based demand, strong deal wins, continued traction in digital and cloud, ramp-up of large deals and demand recovery in highly impacted verticals like travel, hospitality and manufacturing is expected to push the topline higher.

Margin pressures

Brokerages see margins declining sequentially for the IT sector during the quarter due to the annual wage hikes especially for TCS, Tech Mahindra, L&T Tech and Coforge however net currency impact may offset. Most players have reverted to their traditional wage revision cycle despite the delayed cycle in FY21 leading to wage revisions within 3-9 months. The war for talent is likely to weigh in on margins.

Robust deal wins

ICICI Direct in its report has said that acceleration in digital technologies & improved deal pipeline will lend support. Furthermore companies are also seeing a demand tailwind in terms of cost takeout by clients, vendor consolidation opportunities which could further propel demand in coming quarters.

Guidance

Brokerages maintain that Infosys and Wipro are expected revise their full-year and quarterly guidance, but HCL Technologies is likely to retain FY22 revenue growth guidance.

“We expect Infosys to revise its FY22 revenue growth guidance upward to 13-15% in constant currency YoY. HCL Technologies is expected to retain its double-digit revenue growth guidance for FY22. Wipro is expected to guide for 5.5-7.5% constant-currency QoQ revenue growth for Q2FY22,” said Emkay Global.

Top Picks

Motilal Oswal Financial Services

Strong sequential growth and the expectation of a lucrative guidance for FY22 should help sustain the rally in IT stocks, despite their premium valuations. Among largecap players, we like Infosys and HCL Tech. Prefer  L&T Technology Services, Mphasis, Cyient, and Zen Technologies in the midcap space.

CLSA

Moderated expectations and stock consolidation over the past three months provide a good base for a move up, especially for large-cap companies, in our view. Infosys, TCS, HCL Technologies and Tech Mahindra are its preferred stock picks.

Emkay Global

Prefer Tier-I stocks over midcaps. Our pecking order is Infosys, HCL Technologies and Tech Mahindra. We turn cautious on mid-caps considering rich valuations and anticipated pressure on margins.

ICICI Direct

Prefer Infosys among tier-1 companies and Mindtree & Coforge from the midcap segment.